Question 1

Use the figure for the question(s) below.
 
-Which of the following statements regarding timelines is FALSE?

Accepted Answer

A) Timelines are an important first step in organizing and then solving a financial problem. 
B) We refer to a series of cash flows lasting several periods as a stream of cash flows. 
C) Not every stream of cash flows can be represented on a timeline. 
D) A timeline is a linear representation of the timing of the (expected)cash flows. 
A) Timelines are an important first step in organizing and then solving a financial problem. 
B) We refer to a series of cash flows lasting several periods as a stream of cash flows. 
C) Not every stream of cash flows can be represented on a timeline. 
D) A timeline is a linear representation of the timing of the (expected)cash flows. C

Question 2

You have an $8000 balance on your credit card,which charges 12% interest annually (1% per month).If you can afford to pay $100 per month,how many months will it take to pay the credit card in full?

Accepted Answer

A) 170 months 
B) 14 months 
C) 162 months 
D) You will never get the card paid off at that rate. 
A) 170 months 
B) 14 months 
C) 162 months 
D) You will never get the card paid off at that rate. C

Question 3

Use the information for the question(s)below.
Suppose that a young couple has just had their first baby,a daughter,and they wish to ensure that enough money will be available to pay for her college education.Currently,college tuition,books,fees,and other costs,average $12,500 per year.On average,tuition and other costs have historically increased at a rate of 4% per year.
-Assume that college costs continue to increase an average of 4% per year and that all her college savings are invested in an account paying 7% interest.Draw a timeline that details the amount of money she will need to have in the future for each of her four years of her undergraduate education.

Accepted Answer

Note that the tuition for the first year is calculated as: $12,500(1.04)18 = $25,322.71

Question 4

Consider the following timeline detailing a stream of cash flows:   If the current market rate of interest is 6%,then the future value of this stream of cash flows is closest to:

Accepted Answer

A) $1723. 
B) $1500. 
C) $1626. 
D) $1288. 
A) $1723. 
B) $1500. 
C) $1626. 
D) $1288.

Question 5

At an annual interest rate of 7%,the present value of $5000 received in five years is closest to:

Accepted Answer

A) $3565. 
B) $6750. 
C) $7015. 
D) $7035. 
A) $3565. 
B) $6750. 
C) $7015. 
D) $7035.

Question 6

Wyatt Oil is considering drilling a new self-sustaining oil well at a cost of $1,000,000.This well will produce $100,000 worth of oil during the first year,but as oil is removed from the well the amount of oil produced will decline by 2%,per year forever.If Wyatt Oil's appropriate interest rate is 8%,then the NPV of this oil well is closest to:

Accepted Answer

A) -$250,000. 
B) $0. 
C) $250,000. 
D) $1,000,000. 
A) -$250,000. 
B) $0. 
C) $250,000. 
D) $1,000,000.

Question 7

Consider the following timeline:   If the current market rate of interest is 10%,then the future value of the cash flows on this timeline is closest to:

Accepted Answer

A) $666. 
B) $500. 
C) $605. 
D) $650. 
A) $666. 
B) $500. 
C) $605. 
D) $650.

Question 8

Use the figure for the question(s) below.
 
-Which of the following statements regarding the timeline is TRUE?

Accepted Answer

A) Date 1 is the beginning of the first year. 
B) Date 2 is the beginning of the second year. 
C) Date 1 is the beginning of the second year. 
D) Date 0 is the end of the first year. 
A) Date 1 is the beginning of the first year. 
B) Date 2 is the beginning of the second year. 
C) Date 1 is the beginning of the second year. 
D) Date 0 is the end of the first year.

Question 9

Consider the following timeline:   If the current market rate of interest is 9%,then the present value of the cash flows on this timeline as of year 0 is closest to:

Accepted Answer

A) $492. 
B) $637. 
C) $600. 
D) $400. 
A) $492. 
B) $637. 
C) $600. 
D) $400.

Question 10

Use the information for the question(s)below.
Assume that you are 30 years old today and that you are planning on retirement at age 65.Your current salary is $45,000 and you expect your salary to increase at a rate of 5% per year as long as you work.To save for your retirement,you plan on making annual contributions to a retirement account.Your first contribution will be made on your 31st birthday and will be 8% of this year's salary.Likewise,you expect to deposit 8% of your salary each year until you reach age 65.Assume that the rate of interest is 7%.
-Your son is about to start kindergarten in a private school.Currently,the tuition is $12,000 per year,payable at the start of the school year.You expect annual tuition increases to average 6% per year over the next 13 years.Assuming that your son remains in this private school through high school and that your current interest rate is 7%,then the present value of your son's private school education is closest to:

Accepted Answer

A) $332,300. 
B) $147,546. 
C) $155,800. 
D) $156,000. 
A) $332,300. 
B) $147,546. 
C) $155,800. 
D) $156,000.

Question 11

Taggart Transcontinental currently has a bank loan outstanding that requires it to make three annual payments at the end of the next three years of $1,000,000 each.The bank has offered to allow Taggart Transcontinental to skip making the next two payments in lieu of making one large payment at the end of the loan's term in three years.If the interest rate on the loan is 6%,then the final payment that the bank will require to make Taggart Transcontinental indifferent between the two forms of payments is closest to:

Accepted Answer

A) $2,673,000. 
B) $3,000,000. 
C) $3,184,000. 
D) $3,375,000. 
A) $2,673,000. 
B) $3,000,000. 
C) $3,184,000. 
D) $3,375,000.

Question 12

Which of the following formulas is INCORRECT?

Accepted Answer

A) PV of a growing annuity = C ×     
B) PV of an annuity = C ×     
C) PV of a growing perpetuity =   
D) PV of a perpetuity =   
A) PV of a growing annuity = C ×     
B) PV of an annuity = C ×     
C) PV of a growing perpetuity =   
D) PV of a perpetuity =

Question 13

Use the information for the question(s)below.
Assume that you are 30 years old today and that you are planning on retirement at age 65.Your current salary is $45,000 and you expect your salary to increase at a rate of 5% per year as long as you work.To save for your retirement,you plan on making annual contributions to a retirement account.Your first contribution will be made on your 31st birthday and will be 8% of this year's salary.Likewise,you expect to deposit 8% of your salary each year until you reach age 65.Assume that the rate of interest is 7%.
-Dagny Taggart is a graduating college senior and she is considering the costs of going to medical school.Beginning next fall,Dagny expects medical school tuition to run $45,000 for the first year (paid at the end of each year)and she estimates that tuition will increase by 6% each year.If Dagny is able to invest her money in an account paying 8% interest per year,then the present value to Dagny of four years of medical school tuition is closest to:

Accepted Answer

A) $149,045. 
B) $155,930. 
C) $162,095. 
D) $180,000. 
A) $149,045. 
B) $155,930. 
C) $162,095. 
D) $180,000.

Question 14

Which of the following statements is FALSE?

Accepted Answer

A) Finding the present value and compounding are the same. 
B) A dollar today and a dollar in one year are not equivalent. 
C) If you want to compare or combine cash flows that occur at different points in time,you first need to convert the cash flows into the same units and/or move them to the same point in time. 
D) The equivalent value of two cash flows at two different points in time is sometimes referred to as the time value of money. 
A) Finding the present value and compounding are the same. 
B) A dollar today and a dollar in one year are not equivalent. 
C) If you want to compare or combine cash flows that occur at different points in time,you first need to convert the cash flows into the same units and/or move them to the same point in time. 
D) The equivalent value of two cash flows at two different points in time is sometimes referred to as the time value of money.

Question 15

Consider the following timeline detailing a stream of cash flows:   If the current market rate of interest is 10%,then the present value of this stream of cash flows is closest to:

Accepted Answer

A) $674. 
B) $600. 
C) $460. 
D) $287. 
A) $674. 
B) $600. 
C) $460. 
D) $287.

Question 16

Henry Rearden is saving for retirement and has determined that to live comfortably he must save $3 million by his 65th birthday.Henry just turned 30 today,and he has decided that starting today and continuing on every birthday up to and including his 65th birthday,he will deposit the same amount into an individual retirement account (IRA).If Henry can earn 8% on his IRA,then the amount he must set aside each year to make sure that he will have $3 million in his account on his 65th birthday is closest to:

Accepted Answer

A) $16,035. 
B) $17,410. 
C) $83,335. 
D) $85,715. 
A) $16,035. 
B) $17,410. 
C) $83,335. 
D) $85,715.

Question 17

Francisco d'Anconia is considering an investment opportunity that costs $10,000 today and will pay $11,500 in two years.The IRR of this opportunity is closest to:

Accepted Answer

A) 7.24%. 
B) 7.50%. 
C) 10.00%. 
D) 15.00%. 
A) 7.24%. 
B) 7.50%. 
C) 10.00%. 
D) 15.00%.

Question 18

Assume that you are 30 years old today,and that you are planning on retiring at age 65.Your current salary is $45,000 and you expect your salary to increase at a rate of 5% per year as long as you work.To save for your retirement,you plan on making annual contributions to a retirement account.Your first contribution will be made on your 31st birthday and will be 8% of this year's salary.Likewise,you expect to deposit 8% of your salary each year until you reach age 65.At retirement (age 65)you will begin withdrawing equal annual payments to pay for your living expenses during retirement (on your 65th birthday).If you expect to die one day before your 101st birthday (your last withdrawal will be on your 100th birthday)and if the annual rate of return is 7%,then how much money will you have to spend in each of your golden years of retirement?

Accepted Answer

$71,260
First deposit = .08 ×

Question 19

After your grandmother retired,she purchased an annuity contract for $250,000 that will pay her $25,000 at the end of every year until she dies.The appropriate interest rate for this annuity is 8%.The number of years that your grandmother must live in order to get more value out of the annuity than the purchase price is closest to:

Accepted Answer

A) 21. 
B) 16. 
C) 8. 
D) 10. 
A) 21. 
B) 16. 
C) 8. 
D) 10.

Question 20

Use the information for the question(s)below.
Assume that you are 30 years old today and that you are planning on retirement at age 65.Your current salary is $45,000 and you expect your salary to increase at a rate of 5% per year as long as you work.To save for your retirement,you plan on making annual contributions to a retirement account.Your first contribution will be made on your 31st birthday and will be 8% of this year's salary.Likewise,you expect to deposit 8% of your salary each year until you reach age 65.Assume that the rate of interest is 7%.
-You work for a pharmaceutical company that has developed a new drug.The patent on the drug will last for 17 years.You expect that the drug will produce cash flows of $10 million in its first year and that this amount will grow at a rate of 4% per year for the following 16 years.Once the patent expires,other pharmaceutical companies will be able to produce generic equivalents of your drug and competition will drive any future profits to zero.If the interest rate is 12% per year,then the present value of producing this drug is closest to:

Accepted Answer

A) $71 million. 
B) $90 million. 
C) $170 million. 
D) $105 million. 
A) $71 million. 
B) $90 million. 
C) $170 million. 
D) $105 million.

Exam 4: The Time Value of Money

Use the figure for the question(s) below. -Which of the following statements regarding timelines is FALSE?

You have an $8000 balance on your credit card,which charges 12% interest annually (1% per month).If you can afford to pay $100 per month,how many months will it take to pay the credit card in full?

Consider the following timeline detailing a stream of cash flows: If the current market rate of interest is 6%,then the future value of this stream of cash flows is closest to:

At an annual interest rate of 7%,the present value of $5000 received in five years is closest to:

Consider the following timeline: If the current market rate of interest is 10%,then the future value of the cash flows on this timeline is closest to:

Use the figure for the question(s) below. -Which of the following statements regarding the timeline is TRUE?

Consider the following timeline: If the current market rate of interest is 9%,then the present value of the cash flows on this timeline as of year 0 is closest to:

Which of the following formulas is INCORRECT?

Which of the following statements is FALSE?

Consider the following timeline detailing a stream of cash flows: If the current market rate of interest is 10%,then the present value of this stream of cash flows is closest to:

Francisco d'Anconia is considering an investment opportunity that costs $10,000 today and will pay $11,500 in two years.The IRR of this opportunity is closest to:

The Corporation

Introduction to Financial Statement Analysis

Financial Decision Making and the Law of One Price

Interest Rates

Valuing Bonds

Investment Decision Rules

Fundamentals of Capital Budgeting

Valuing Stocks

Capital Markets and the Pricing of Risk

Optimal Portfolio Choice and the Capital Asset Pricing Model

Estimating the Cost of Capital

Investor Behavior and Capital Market Efficiency

Capital Structure in a Perfect Market

Debt and Taxes

Financial Distress,managerial Incentives,and Information

Payout Policy

Capital Budgeting and Valuation With Leverage

Valuation and Financial Modeling: a Case Study

Financial Options

Option Valuation

Real Options

Raising Equity Capital

Debt Financing

Leasing

Working Capital Management

Short-Term Financial Planning

Mergers and Acquisitions

Corporate Governance

Risk Management

International Corporate Finance

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